Recording Adjusting and Closing Entries for a Service Business

1. Recording Adjusting and Closing Entries for a Service Business Chapter 8

2. Terms • Adjusting entries • Permanent accounts • Temporary accounts • Closing entries • Post-closing trial balance • Accounting Cycle

3. Section 8-1: Recording Adjusting Entries • Adjustments on a worksheet must be journalized so they can be posted to the general ledger accounts • Adjusting entries are recorded on the next journal page…. • Journalizing Supplies and Prepaid Insurance

4. 3 4 ADJUSTING ENTRY FOR SUPPLIES page 202 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. 1 4. Write the title of the account credited. Record the credit amount. 2

5. 2 3 ADJUSTING ENTRY FOR PREPAID INSURANCE page 204 1. Write the date. 2. Write the title of the account debited.Record the debit amount. 3. Write the title of the account credited. Record the credit amount. 1

6. Practice Journalizing Adjusting Entries • Working Together • Application 8-1

7. Section 8-2: Recording Closing Entries • Permanent accounts- used to accumulate information from one fiscal period to the next (real accounts) • Assets, Liabilities, Capital • Ending balances = beginning balances for next period • Temporary accounts – used to accumulate information until it is transferred to the owner’s capital account (nominal accounts) • Revenue, Expenses, Drawing, Income Summary

8. Temporary Accounts • Show changes in the owner’s capital account for a single period • End of each fiscal period, balances of temporary accounts are summarized and transferred to the owner’s capital account • Temporary accounts begin new fiscal period with a zero balance.

9. Need for Closing Temporary Accounts • Closing Entries – preparing temporary accounts for a new fiscal period • Accounts must be reduced to zero • Difficult to analyze and calculate of period information was blended • To close – amount = to balance will be recorded on opposite side of the account to reduce to a 0 balance.

10. Need for the Income Summary Account • When temporary accounts are closed – debits still must = credits • Income Summary account is used to summarize the closing entries for revenue and expenses • Income Summary Account • No normal balance • Balance is determined by amount posted • Example on Board

11. Four Closing Entries • 1. An entry to close income statement accounts with credit balances (SALES) • 2. An entry to close income statement accounts with debit balances (EXPENSE ACCOUNTS) • 3. An entry to close net income or net loss AND close Income Summary • 4. An entry to close the owner’s drawing account

12. NEED FOR THE INCOME SUMMARY ACCOUNT page 207

13. 3 4 CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE page 208 1 2 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. 4. Write the title of the account credited. Record the credit amount.

14. 3 CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES page 209 1. Date 2. Income Summary 3. Credit 2 4 1 4. Debit amount

15. Balance in Income Summary • Net Income for the period the account will have a credit balance • Net Loss the account will have a debit balance • After closing the revenue and expenses into Income Summary it represents the balance of net income or incurred loss. • This now must be closed – income summary is also a temporary account

16. 2 3 CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT page 210 1

17. 2 3 CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT page 211 1

18. Four Closing Entries • Revenue (Sales) into Income Summary • Expenses into IS • Income Summary into Capital • Drawing into Capital This information can be taken from the income statement and balance sheet columns of a worksheet

19. Visualization of Closing Entries FISH BOWL EXAMPLE • Revenue • Expenses • Income Summary • Drawing • Journalize than Post

20. Practice • Section 2 Working Together • Application 8-2

21. REVIEW • Go Over Homework • Soaking Up Closing Entries

22. Section 8-3: Post-Closing Trial Balance • After adjusting and closing entries are journalized and posted the general ledger has all account balances up to date • Accounts with 0 balances have a line drawn through both the debit and crdit balance columns • Verifies debit=credit by preparing post-closing trial balance

23. Post-closing trial balance • Only general ledger accounts with balances are included • Permanent accounts • Assets, Liabilities, & Capital • Debits=Credits

24. Accounting Cycle for a Service Business • Analyze Transactions (SD) • Journalize • Post • Prepare Worksheet • Prepare Financial Statements • Journalize Adjusting and Closing Entries • Post Adjusting and Closing Entries • Prepare Post-closing Trial Balance Sally’s Jolly PIG Wilbur Followed Aunt Clara’s Pretty Pony

25. Practice • Working Together 3 • Applications Problem 8-3 • Mastery • Challenge

26. REVIEW • M&M ACTIVITY • STUDY GUIDE